Real Estate
August 21, 2018
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How much of your income should go towards a mortgage payment?

By: Scott Sheldon
July 27, 2018

One of the challenges home buyers face when purchasing a house for the first time is figuring out how much of their income should go towards a mortgage payment. This number varies greatly and just because the bank tells you can take on a certain payment to income ratio that doesn’t necessarily mean you should. Here is why…

First things first, a debt to income ratio is the amount of percentage that your debt is in relationship to your monthly income. For example, let’s say you make $10,000 per month half of $10,000 per month is $5,000 a month representing a 50 percent debt to income ratio. Some loans including FHA loans and conventional loans will allow you to take on a mortgage payment up to 50 percent of your monthly income. The calculation is computed by taking the total mortgage payment comprised of principal interest taxes and insurance and any applicable private mortgage insurance plus any minimum payments you might have on any other credit account obligations adding the sum of those two numbers together and dividing it into your monthly income. If this number exceeds even one percent on a conventional loan you’re not going to be able to get a mortgage unless you bring that number down to 50 percent debt to income ratio or lower.

Mortgage tip: FHA loans and VA loans sometimes may allow up to 55 percent debt to income ratio.

While mortgage lending guidelines may allow you to take on up to half of your income in debt load, a good general rule of thumb might be to consider taking on a mortgage payment that would be no more than 36 percent of your current monthly liabilities as well as the proposed housing payment.

For example, going back to our scenario at $10,000 per month that would mean not taking on the mortgage payment more than $3,600 a month including the other monthly expenses in your life. The reason why this number is conservative is because it takes into consideration gross income and more importantly your ability to save. In other words, it would be easier save money each month if your debt-to-income ratio was in the 36 percent range then it would be if your debt-to-income ratio is in the 50 percent range. So, what happens when your debt to income ratio is right around the 40 or 42 percent mark?

 

Some things to consider:

Can you pay off a debt to qualify with your cash? If the answer is yes, then this can very easily lower your debt to income ratio and can make a mortgage payment more manageable with the other monthly bills in your life.

Are you going to be receiving a raise at some point? If your income is going to be changing in the future perhaps you’re changing jobs you’re going into a more affordable situation as your income is poised to rise in the future, it might not be a risky situation to put yourself into a higher debt to income ratio situation for a house purchase if there is something in the future that’s going to change the financial picture for the better.

 

Can you rent out a room in the property?

At the end of the day whether your debt to income ratio is 36 percent of your income or 40 percent of your income whatever the debt to income ratio number is if you’re saving money from your net paycheck that is the optimal situation that you want to be in while still being able to maintain a budget and a life and the mortgage at the same time.

Looking to buy a home and need help with a budget? Start with a no cost quote now.

 

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.